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RBA minutes; consumer confidence falls

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Consumer confidence; Reserve Bank Board Minutes; RBA Governor Speech

  • Consumer confidence: The weekly ANZ/Roy Morgan consumer confidence rating fell by 0.9 per cent in the week to April 19 to an 8-month low 108.8.
  • Reserve Bank Board minutes: “Members also saw advantages in receiving more data, including on inflation, to assess whether or not the economy was on the previously forecast path and allowing more time for the economy to respond to the reduction in the cash rate earlier in the year.”
  • Reserve Bank Governor’s speech: “interest rates should be quite accommodative and the question of whether they should be reduced further has to be on the table.”

What does it all mean?

The minutes from the last RBA board meeting have proved just as useful as the speech from the Reserve Bank (RBA) Governor. In simple terms, rate cuts remain on the table, but the RBA Board is taking a measured approach, waiting to see the inflation data (released tomorrow). But members are also clearly aware that monetary policy can only do so much. While this isn’t a surprise to economists, it may be to so-called ‘expert media commentators.

The Reserve Bank Board minutes also contained observations on the ‘unusual trading’ in the Aussie dollar after the February and March Board decisions. The explanation being that trade is illiquid around the time of rate announcements and “small trades could move the price by relatively large amounts, and that once such movements occurred it would be highly likely that algorithmic trading strategies would exacerbate such movements.”

The RBA Governor has indicated that ‘other policies’ would be helpful in economic growth, income and confidence. Politics can play a big role, including more bipartisan support for key fiscal measures including the Budget. No doubt the Reserve Bank Governor wants to see Aussies coming away from the Federal Budget feeling more chipper.

While consumer confidence is apparently down, retail spending has been strengthening, while home buying has also been strong and luxury car sales are at record high.

So it is important not to over-state the confidence results. Consumers actually believe their finances will be stronger over the next year despite being negative on the outlook for the economy. Go figure.

What do the figures show?

Consumer sentiment

  • The ANZ/Roy Morgan consumer confidence rating fell by 0.9 per cent to an 8-month low of 108.8 in the week to April 19, below the average since 2014 of 111.3.
  • Two of the five components of the index rose in the latest week:
    >The estimate of family finances compared with a year ago was down from +6 to +3;
    >The estimate of family finances over the next year was up from +23 to +25;
    >Economic conditions over the next 12 months was down from -12 to -16;
    >Economic conditions over the next 5 years was down from +3 to +2;
    >The measure on whether it was a good time to buy a major household item was up from +29 to +30.

Imports

  • The Australian Bureau of Statistics notes that imports of goods fell by 3% in seasonally adjusted terms in March. Falls occurred in cars, capital goods and intermediate goods.

Land sales and prices

  • Data from the Housing Industry Association/CoreLogic RP Data residential land report shows that the number of residential land sales fell by 11.8% over the year to the December 2014 quarter. At the same time, the weighted median residential land value increased by 2.8% in the December 2014 quarter to be up by 6.3% over the year.

Reserve Bank Board minutes

The key quotes from the Board minutes:

  • Interest rates: “In considering whether or not to reduce the cash rate further at this meeting, members discussed the various channels through which monetary policy was affecting the economy at present, including the asset price and exchange rate channels. In assessing the operation of the cash flow channel in particular, they noted that the responsiveness of borrowers and savers to changes in interest rates and asset prices was unusually uncertain in a world of very low interest rates and high household leverage. Members also saw advantages in receiving more data, including on inflation, to assess whether or not the economy was on the previously forecast path and allowing more time for the economy to respond to the reduction in the cash rate earlier in the year.
  • Taking all these factors into account, the Board judged that it was appropriate to hold interest rates steady for the time being, while accepting that further easing of policy may be appropriate over the period ahead to foster sustainable growth in demand and inflation consistent with the target. The Board would continue to assess the case for such action at forthcoming meetings.”
  • Australian dollar trading: “The Board’s discussion of financial markets commenced with the unusual trading in the Australian dollar that occurred in the period immediately prior to the announcement of the Board’s decisions in both February and March. Members noted that the illiquid conditions that existed in the foreign exchange market at that time meant that small trades could move the price by relatively large amounts, and that once such movements occurred it would be highly likely that algorithmic trading strategies would exacerbate such movements, particularly given the illiquid environment. Moreover, the occurrence of these movements meant that liquidity was likely to decline further as more liquidity providers pulled back from the market during this window.
  • Members were aware of the investigations currently being undertaken by the Australian Securities and Investments Commission and were informed that internal work since the March meeting had not identified any evidence of procedural lapses or conduct that could have led to the early release of relevant information.”

Reserve Bank Governor Speech:

Key quotes from the Reserve Bank Governor’s speech:

  • Rate cuts can only do so much: … “the balance that the Reserve Bank Board has struck has seen the policy rate held at what would once have been seen as extraordinarily low levels for quite a while now. The Board has, moreover, clearly signalled a willingness to lower it even further, should that be helpful in securing sustainable economic growth. The Board has been proceeding with a degree of caution that is appropriate in the circumstances. It also has, I would say, a realistic assessment of how much monetary policy can be expected to achieve in supporting the adjustment the economy needs to make.”
  • Not just interest rates: “Any help in boosting sustainable growth from other policies would, of course, be welcome. In particular, things that could credibly be seen as lifting prospects for future income, and increasing confidence in those prospects, would give easy monetary policy a good deal more traction.”
  • Budget: “On the fiscal front, the government has little choice but to accept the slower path of deficit reduction over the near term. But over the longer term, hard thinking still needs to occur about the persistent gap we are likely to see (under current policy settings) between the government’s permanent income via taxes and its permanent spending on the provision of good and services.”
  • Budget: “More generally, the more reluctant households are to lower their saving and increase their spending the harder the government may find it to increase its saving.”
  • Rate cuts are working: “Housing starts will reach high levels this year and wealth effects do appear to be helping consumption, which is rising faster than income.”
  • Aussie dollar: “The Australian dollar has declined and will very likely fall further yet, over time.”

What is the importance of the economic data?

The ANZ/Roy Morgan weekly survey of consumer confidence closely tracks the monthly Westpac/Melbourne

Institute consumer sentiment index but the former measure is a timelier assessment of consumer attitudes and is now closely tracked by the Reserve Bank.

The Reserve Bank releases minutes of its monthly Board meeting a fortnight after the event. The minutes give a guide to Reserve Bank thinking on interest rate settings.

What are the implications for interest rates and investors?

As we have noted in the past, each Reserve Bank Board meeting in the next couple of months is a ‘live’ meeting – that is, the Board could decide to cut rates. It is now all about strategy. And while the Reserve Bank isn’t sharing all its thoughts with the public, it is clear that Board members want to ensure that inflation is remaining low before cutting rates again. CommSec expects another rate cut on 5 May, but it is by no means a certain bet.

The Reserve Bank Board isn’t going to blindly cut rates over 2015. It will stop frequently to assess whether cuts are working – and if there are positive signs, then it will wait a little longer before deciding on further cuts.

The Reserve Bank is making it clear to all that will listen that it can only do so much. If Aussies want to hold on to their savings at the expense of spending, then no manner of rate cuts is likely to change the decision.

The 3% fall in imports in March confirms the softness of consumer and business spending.

The drop in land sales and lift in prices highlights the role that governments can play in getting the economy moving. Supply of land is insufficient to meet demand and prices are rising. State and local governments need to consider the adequacy of current planning and land production policies.